Protecting Retirement Accounts in a New York City Bankruptcy

For many New Yorkers considering bankruptcy, the single most valuable asset they own is not a home or a car — it is a retirement account. A 401(k) built over twenty years of work, a city pension, or an IRA rollover often represents a lifetime of savings. The good news is that both federal bankruptcy law and New York law provide some of the strongest protections anywhere for retirement funds. The bad news is that these protections are not automatic in every situation, and the mistakes debtors make before filing — such as cashing out a 401(k) to pay credit cards — can destroy protection that the law would otherwise have provided.

This page explains exactly how retirement accounts are treated in a New York City bankruptcy, which statutes govern, where the traps lie, and what you should do before you file.

The Legal Framework: Three Layers of Protection

Retirement accounts in a New York bankruptcy are shielded by three overlapping bodies of law, and understanding which one applies to your account determines how safe your money actually is.

1. ERISA-Qualified Plans Are Excluded from the Bankruptcy Estate — 11 U.S.C. § 541(c)(2)

When you file bankruptcy, everything you own becomes property of the "bankruptcy estate" under 11 U.S.C. § 541. But § 541(c)(2) carves out property subject to a restriction on transfer enforceable under "applicable nonbankruptcy law." The United States Supreme Court has held that the anti-alienation provision required in every ERISA-qualified plan is exactly such a restriction. The practical result:

• 401(k) plans
• 403(b) plans (common for hospital and nonprofit employees)
• Defined-benefit pensions, including New York City public pensions such as NYCERS and the Teachers' Retirement System
• Profit-sharing and money-purchase plans

never enter the bankruptcy estate at all. The Chapter 7 trustee cannot touch them, regardless of the balance. A debtor with $900,000 in an employer 401(k) keeps every penny — no exemption even needs to be claimed, though careful practitioners list the account and assert the exclusion anyway to eliminate ambiguity.

2. New York's Exemption for IRAs and Other Plans — CPLR 5205(c) and Debtor and Creditor Law § 282

IRAs are not ERISA plans, so they do become property of the estate and must be exempted. New York law does this through CPLR 5205(c), incorporated into bankruptcy by Debtor and Creditor Law § 282. CPLR 5205(c) exempts trusts, custodial accounts, and annuities that qualify under Internal Revenue Code §§ 401, 402, 403(b), 408, 408A, 457, or 501(c)(3), including:

• Traditional IRAs and Roth IRAs
• SEP-IRAs and SIMPLE IRAs used by self-employed New Yorkers
• Keogh plans
• Section 457 deferred-compensation plans held by city and state employees

Critically, the New York exemption has no dollar cap for the debtor's own qualified retirement accounts. However, there is a significant timing rule: under CPLR 5205(c)(5), contributions made within 90 days before the filing (technically, before the interposition of the claim) are not exempt. If you deposited $15,000 into your IRA six weeks before filing, the trustee can claim that $15,000 even though the rest of the account is untouchable. This 90-day lookback is one of the most common reasons an experienced attorney will tell a client to wait before filing.

3. The Federal Exemptions — 11 U.S.C. § 522(b)(3)(C), § 522(d)(12), and the § 522(n) Cap

New York is one of the states that lets debtors choose between the state exemption scheme and the federal exemptions under Debtor and Creditor Law § 285. If you elect the federal scheme — often done to use the federal "wildcard" exemption — your retirement accounts are protected under 11 U.S.C. § 522(d)(12), which exempts retirement funds in tax-exempt accounts. Even debtors using state exemptions get the parallel protection of § 522(b)(3)(C).

One cap applies under federal law: 11 U.S.C. § 522(n) limits the exemption for traditional and Roth IRAs (but not employer plans or rollover IRAs funded from employer plans) to an inflation-adjusted ceiling — $1,711,975 for cases filed on or after April 1, 2025, adjusted every three years. For the overwhelming majority of filers, this cap is irrelevant, but high-balance IRA holders must plan around it. Because rollovers from a 401(k) are excluded from the cap, tracing the source of IRA funds can be decisive.

Choosing between the state and federal exemption schemes is a case-by-case decision that affects far more than retirement accounts — home equity, cash, and vehicles all hang in the balance. Our overview of New York bankruptcy exemptions explains how the two systems compare.

Where the Protection Breaks Down

Money Withdrawn from a Retirement Account Loses Protection Immediately

This is the mistake that costs New Yorkers more retirement money than any other. The exemption protects funds inside a qualified account. The moment you withdraw money, it becomes ordinary cash — exempt only to the extent New York's very limited cash exemptions cover it.

Worked example: A Queens debtor facing $60,000 in credit card debt withdraws $40,000 from her 401(k) to make minimum payments. Eighteen months later, the debt has grown back and she files Chapter 7. The outcome: the $40,000 is gone, she owes roughly $12,000–$14,000 in income tax and the 10% early-withdrawal penalty on the distribution, and the credit cards are discharged anyway — the same discharge she would have received while keeping the full $40,000 in her 401(k). Had she consulted a bankruptcy attorney first, she would have kept the entire account. Never liquidate retirement funds to pay dischargeable debt without legal advice.

Inherited IRAs Are a Danger Zone

The U.S. Supreme Court has held that an inherited IRA — one you received as a beneficiary rather than funded yourself — is not "retirement funds" under the federal exemptions. Whether CPLR 5205(c) protects inherited IRAs in New York remains contested territory, and bankruptcy courts have reached unfavorable conclusions for debtors. If you hold an inherited IRA, do not file anything until an attorney has analyzed the account, the exemption election, and the timing of your case.

Creditors Who Can Reach Retirement Accounts Even in Bankruptcy

• The IRS. A federal tax lien attaches to retirement accounts, and the exemptions in § 522 do not defeat a properly filed tax lien. If you owe back federal taxes, the interplay between the lien, the account, and the discharge requires careful sequencing — see our page on handling IRS tax debt in a New York City bankruptcy.
• Domestic support obligations. A qualified domestic relations order (QDRO) from a divorce divides a retirement plan notwithstanding any exemption, and support arrears may be enforced against retirement income.
• The plan itself. An outstanding 401(k) loan is effectively secured by your own account; defaulting converts the balance to a taxable deemed distribution.

Retirement Accounts and the Means Test

Retirement accounts matter not only as assets but also on the income side of your case. On the Chapter 7 means test, voluntary 401(k) contributions generally cannot be deducted, but 401(k) loan repayments can be in Chapter 13, where 11 U.S.C. § 1322(f) expressly provides that amounts required to repay a plan loan are excluded from disposable income. In Chapter 13, ongoing contributions withheld by an employer are also excluded from the estate under 11 U.S.C. § 541(b)(7), though courts scrutinize contribution levels for good faith. For a debtor slightly over the median income, the treatment of a $450-per-month 401(k) loan repayment can be the difference between a confirmable plan and an objection.

Procedure: How Protection Is Actually Claimed

1. Disclose every account. All retirement assets are listed on Schedule A/B filed with the petition. Concealing an account — even one that is fully protected — risks denial of discharge under 11 U.S.C. § 727.
2. Claim the exemption on Schedule C. For IRAs and non-ERISA accounts, cite CPLR 5205(c) and Debtor and Creditor Law § 282, or 11 U.S.C. § 522(d)(12) if the federal scheme is elected. ERISA accounts are noted as excluded under § 541(c)(2).
3. Watch the objection deadline. Under Federal Rule of Bankruptcy Procedure 4003(b), the trustee or a creditor has 30 days after the conclusion of the § 341 meeting of creditors to object to a claimed exemption. If no timely objection is filed, the exemption stands even if it was arguably improper.
4. Document the account's pedigree. Bring plan documents, the IRA custodial agreement, and rollover paperwork to your attorney. If your IRA contains a 401(k) rollover, the paper trail is what defeats the § 522(n) cap and trustee challenges.

Pre-Filing Planning: Do's and Don'ts

• Do keep making your regular payroll retirement contributions — but do not suddenly increase them or make large lump-sum IRA deposits, which the 90-day rule of CPLR 5205(c)(5) and fraudulent-transfer law can unwind.
• Do keep rollover funds in a separate rollover IRA rather than commingling them with annual contributions.
• Don't withdraw retirement money to pay unsecured creditors, family loans, or arrears that bankruptcy could resolve — including co-op maintenance or condo common charges, where structured solutions exist for co-op shareholders and condo owners facing arrears.
• Don't take a new 401(k) loan on the eve of filing without advice; timing affects both the means test and plan feasibility.
• Don't move IRA money into a non-qualified account "for safekeeping." That is the one move guaranteed to strip its protection.

Frequently Asked Questions

Will the Chapter 7 trustee take my NYCERS or TRS pension?

No. New York public pensions carry statutory anti-alienation protections and are excluded from the estate. Your monthly pension income, however, counts as income for the means test and Chapter 13 plan calculations.

Is my Roth IRA treated differently from my traditional IRA?

No — both are exempt under CPLR 5205(c) with no state dollar cap, and both are subject to the same 90-day contribution lookback and, under the federal scheme, the § 522(n) aggregate cap.

I already cashed out part of my 401(k). Is bankruptcy still worth it?

Usually yes. Whatever remains in the account can still be fully protected, and the tax debt generated by the withdrawal can often be addressed in the case. The key is to stop the bleeding now and file on a properly planned timeline — or, where a garnishment or account restraint is imminent, through an emergency bankruptcy filing.

You can contact the Law Offices of Albert Goodwin by phone at 212-233-1233 or by email at [email protected].